Rajaratnam defense proceeds to call witnesses

The prosecution in the trial against Raj Rajaratnam rested its case on April 6, and the defense will begin calling witnesses Monday.

Rajaratnam, who received a Wharton School MBA in 1983, is on trial for the largest account of insider trading in United States history, according to prosecutors. They now maintain that Rajaratnam made $63.8 million in profits and avoided losses from insider trading tips for the Galleon Group, a hedge-fund management firm he cofounded.

This number is an increase from the original claim of $45 million. The prosecution changed its estimation based on the testimony of Federal Bureau of Investigation agent James Barnacle on April 5 and 6.

John Dowd, Rajaratnam’s defense attorney, claimed that this figure is irrelevant.

In his cross examination of Barnacle, Dowd asked if he knew that “the total alleged insider trading gains over a period of several years is less than one percent of the assets Galleon traded,” according to court documents.

With this line of questioning, Dowd and the defense are trying to show the jury that Rajaratnam had no motive to waste his time or put himself at legal risk for such a small portion of his total profits.

“The stock trades at issue in this case are a tiny percentage of those trades,” Dowd said in his opening statement. “It does not make sense to pay so much money for stock research to cover up a relatively small number of trades that the government is challenging.”

Dowd is referring to the fact that Galleon spent approximately $300 million annually on stock research, which the prosecution claimed “was just a cover for inside trading,” Dowd said.

In addition to this argument of motive, the defense will make several other claims to prove Rajaratnam’s innocence over the next week.

If convicted, Rajaratnam could face up to 25 years in prison. He pleaded not guilty on Dec. 21, 2009.

The defense released its list of witnesses on April 7. Some are expected to attack the credibility of the prosecution’s key witnesses.

For instance, John Pernell, president of Polaris Investment Partners, will testify that government witness and former Galleon employee Adam Smith told him he was “pressured” into helping the government prosecute Rajaratnam.

Pernell will testify that Smith told him “he didn’t engage in all the insider trading that the government accused [Smith] of,” but prosecutors told Smith “it didn’t matter,” according to court documents.

Penn Law professor David Abrams said this is a very common legal tactic.

“There are many examples where the defense tries to impugn witnesses for ratting on their client because they got a deal from the prosecutors to get their sentence shortened,” Abrams said. “It’s not always correct, but you might as well give it a try.”

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The defense will also try to prove to the jury that the alleged tips were already public information or that they were immaterial — meaning they had no effect on the alleged stock’s market price.

On April 8, Richard Holwell, the Manhattan federal district judge presiding over the case, approved the expert testimony of Gregg Jarrell, former chief economist for the U.S. Securities and Exchange Commission, despite heavy opposition from the prosecution.

Jarrell, now a business professor at the University of Rochester, will testify that the alleged tips were not “material” enough to affect stock prices. He has maintained that any reasonable investor would have traded “just as Mr. Rajaratnam did.”